surrendering home & 2nd payment

[mommyof3]

I've been searching through threads for an answer to my question, but not having much luck-so I'm posting my question for help.

With the help of our atty we've been in the planning stages to file chapter 13 for over 2 years now. Up to now, we didn't qualify for a chapter 7, so we had planned to strip our 2nd & keep our home. We stopped paying the 2nd about 1 year ago.

My husband will now be retiring in 2 months, it's a decent retirement, but it appears that it will be about $1000.00 less each month then what we had planned on. We will now most likely need to surrender our home and see if we will qualify, based on the new figures, for a chapter 7.

Now to my question. If we surrender our home, will we still be responsible for the 2nd payment? I've spent 2 years researching chapter 13, so everything related to chapter 7 is very foreign to me.

Thanks for any advice.

[MSbklawyer]

Now to my question. If we surrender our home, will we still be responsible for the 2nd payment? I've spent 2 years researching chapter 13, so everything related to chapter 7 is very foreign to me.

Thanks for any advice.

No, you will not be personally responsible for the mortgages (1st or 2nd) if you surrender the home in a bankruptcy. The house will be foreclosed and sold. The proceeds of the sale go to pay off the first mortgage first. If there is anything left, it is applied to the second mortgage. If there's anything left after that (there rarely is) it goes to you. If the sale doesn't bring enough to cover the mortgages, the shortage -- which is called the 'deficiency' -- is treated as unsecured and discharged.

[btbeme]

Two points to ponder...

1. If you do decide to surrender the house, you will want to stop payment on the 1st mortgage at some time as well. The timing on doing so would be a good point to discuss with your attorney, in part because of point #2 below. But, as above, you will have no personal responsibility for the loans so long as you do not reaffirm.

2. It might be a while until you qualify for a Ch 7 because of the 6 month lookback on income. Again, the timing on this is a point to discuss with your attorney.

Assuming you are underwater on the house (both 1st and 2nd) then the BK and walk strategy is a sound one. There are many ways to string out the eventual foreclosure so that you can remain in the home for some time (timing the BK to delay foreclosure plays into that strategy) and can bank payments and find agreeable alternate housing. Stopping payment well before filing Ch 7 might mean that you have too much cash on hand, or might mean that you could lose some of the allowable exemption on your filing, so be sure to map out a timeline with the attorney.

The good news is that, depending on where you are in CA, foreclosures have been taking some time - an average of 10 months in most counties. Many people wait to stop payments until after their 341 hearing, then (a few months after discharge) they apply for a HAMP refinance. This can delay foreclosure for several months - in AZ (similar to CA in foreclosures) we stayed for 16 months without paying and banked every payment.

Let us know how we can help! I think you will find the benefits of a Ch 7 to be much more agreeable than a 13, especially if you want to walk away from the house.

[mommyof3]

Thank you soooo very much MSbklawyer and btbeme for the great advice. I'm sure I'm going to have many more questions along the way, but this was the BIG one for now. Thanks again!